Blog

Three recent economic analyses have been released on the
potential effects of Prop 37 in California, which would require mandatory
labeling of genetically modified foods if passed in November.

Two analyses are by different groups of economists at UC
Davis (Alston
and Sumner and Carter
et al.) and another by a consulting
firm. Each suggest potentially high costs and less consumer choice - exactly the opposite of that predicted by proponents of Prop 37.

The prediction (that Prop 37 will lead to high prices and
less choice,) is based on a key assumption made by the
analysts. The assumption is that processors
and retailers in California will notactually label foods and will
instead substitute toward non-genetically modified ingredients. The assumption is stated explicitly in the
report by the consulting firm:

Based on experience in other parts
of the world, review of the literature, and discussions with academic and
business experts, we believe the most likely means of compliance for food companies
is to substitute other ingredients for GE ingredients in their products. This
means that companies would change the way in which they source ingredients or
manufacture their products in order to avoid labeling their products with a
vague and potentially frightening warning that conveys little meaningful
information.

Thus, most of the cost increase predicted in the studies is
projected to come about from retailers and manufacturers choosing to use more
expensive ingredients to avoid the label.

Is this what retailers will actually do? Here are the reasons I’m not so sure:

Many of the biggest donors
supporting Prop 37 are organic and natural food companies. To fork over millions of dollars in donations
supporting the proposition must mean they believe it will help their bottom line, which will
only happen if food firms actually label their products as containing
genetically modified ingredients.

Prop 37 would imposes zero-tolerance for
accidental presence of biotech in food.
No country in the world (even Europe) imposes a zero-tolerance limit for
their mandatory labels of genetically modified food. Achieving zero-tolerance is practically impossible
and extraordinarily costly. Food firms facing the chance of costly lawsuits may
very well simply decide to label.

Part of the reason there are virtually no
GMO-labeled products in Europe (even though they are allowed) is because of
competition between food companies. It is a type of prisoner’s dilemma problem. Even though all firms could make more money using
GM ingredients, they choose to avoid GM because they know they’ll lose relative
market share to competitors who don’t label. Thus, they all avoid GM and no one
labels. The situation in California is
different because, as mentioned above, the costs of falsely labeling will be
much higher due to the zero-tolerance rule.
Moreover, consumer demand for the absence of GMOs in food
is lower in California than in Europe, as my research
shows. This means the incentives for the
sort of prisoner’s dilemma outcome are lower. None of this is to mention the differences in markets structure of US and European in food retailing (the use of private labels in Europe is much higher and the retailers there exert much more influence on the entire marketing chain).

I do not think the arguments in favor Prop 37 are particularly
strong, but I’m not entirely sure that the assumptions used to project the costs
of Prop 37 will ultimately match what happens if it passes.

Addendum: In the post above, I mention a study by Carter et al. in a way that inadvertently implied they argued that passage of Prop 37 would lead to firms avoiding the label by switching to non-GM or organic. Here's what they actually say in their report:

Prop 37 would
result in many products on the food shelf carrying a GM label. It might get to
the point where there are so many products with GM labels that most consumers
would just ignore the labels because they would be everywhere.

They seem to agree with my point that it will be hard for firms to avoid GE labels given the zero tolerance limit.